US Inflation will not be gone for long

The drop in headline inflation to zero in September might fuel speculations that the Fed will remain on hold well into 2016. However, the move back to zero is likely to be only temporary. Thus unless oil prices continue to nosedive, fading base effects are bound to lift the headline inflation rate sharply in Q4 as the steep fall in energy prices fall out of the year-over-year rate.

"We continue to look for a rebound in headline CPI inflation to around 2% y/y early next year, based on our forecast that oil prices will remain roughly unchanged at current levels", says Nordea bank.

Core CPI inflation rose to 1.9% y/y in September, up from 1.8% in August and stronger than anticipated. The stronger USD continues to put downward pressure on core inflation, mainly by driving down core goods inflation. However, once the impact of the stronger greenback and lower commodity prices fades next year, there is still very good reasons to expect inflation to accelerate, particularly as the economy is close to full employment and rental vacancy rates are near 30-year lows.

While Yellen has said that an increase in core price inflation or wage inflation is not a prerequisite for lift-off in interest rates, a pickup in underlying inflation measures will obviously make the Fed more confident that inflation will move back to 2%.

"We still believe that especially the Q3 employment cost index (ECI) released 30 October and the two remaining job reports ahead of the December FOMC meeting will be decisive for the timing of the first Fed rate hike (December or early 2016)",added Nordea Bank.